Section 1504 doesn’t give undue advantage to Russian companies. (Or Chinese ones for that matter!)
I thought I had heard every possible doomsday scenario guaranteed to result from greater transparency in the extractives sector in the nearly four years since President Obama signed the Dodd-Frank Act into law.
It appears I was wrong.
In a May 11th editorial titled, “The SEC’s Pro-Putin Rule,” the Wall Street Journal (WSJ) suggested that Section 1504, the landmark oil, gas and mining transparency provision of the Dodd-Frank Act, strengthens Russian energy behemoth Gazprom, and by extension Vladimir Putin.
The WSJ’s reasoning was essentially this: by requiring oil, gas and mining companies listed on a US stock exchange to publicly disclose the payments they make to governments at the project level, Section 1504 enables state-owned companies like Russia’s Gazprom to gain a competitive advantage relative to its American peers.
The WSJ completely ignored a key fact, however. Gazprom will also be required to publicly disclose the payments it makes to governments.
You see, the movement to promote transparency in the extractives sector is not unique to the United States. Transparency provisions similar to Section 1504 are in the works or already being put into effect in the European Union, Norway, and Canada. Because Gazprom is listed on the London Stock Exchange, it will be subject to the EU’s transparency rules that align closely with Section 1504 of Dodd-Frank. So will Russia’s Rosneft, Lukoil, Novatek, and Tatneft companies.
Preying on Americans’ fears, the WSJ went on to finger PetroChina as beyond the reach of Section 1504 and supposedly in a unique position to harm its US-listed industry peers. Again, the logic is as muddied as the example. PetroChina is listed on the New York Stock Exchange and thus subject to the disclosure mandate in Dodd-Frank. For that matter, so are Chinese oil companies Sinopec and CNOOC.
The market capitalization, or the value of the issued shares of these seven Russian and Chinese giants, is hardly a drop in the bucket – together exceeding $635 billion.
Here’s two other things the WSJ should have recognized:
- Far from capturing just a sub-set of American extractives companies, Section 1504 brings to light the financial dealings of companies small and large, American and foreign, and state-owned and private.
- In cases where companies are not subject to Section 1504, they often find themselves subject to the equally robust disclosure requirements of other jurisdictions. Indeed, of the world’s 50 largest oil and gas companies by market cap, 94 percent are subject to mandatory disclosure laws in place or in the works in the US, Canada, the EU, or Norway.
In an attempt to advance an ideological agenda, the WSJ clumsily cited two state-owned companies that are in fact covered by transparency laws. Regardless, the WSJ’s underlying message—when extractives companies are subject to mandatory project-level disclosure, they are put at a competitive disadvantage—is just not true.
First, companies cannot simply glean commercially-sensitive information from project-level payment disclosures alone. Doing so would require information on a host of additional variables, including but not limited to production levels, capital investments, tax holidays, production costs, and cost recovery rates. No transparency regime in the world requires the disclosure of this information.
Also, the notion that resource-rich countries are more inclined to award bids to companies exempt from mandatory disclosure requirements is equally misguided. Not surprisingly, countries award bids to companies with the greatest technical and financial capacity to extract resources in a cost-effective way.
As a series of letters to the editor responding to the WSJ’s misguided editorial on Section 1504 aptly pointed out, Vladimir Putin is not strengthened by greater transparency in the extractives sector. Investors, businesses, governments, and communities are.